Tough times for hospital finances

COVID-19's arrival in early 2020 put an unprecedented strain on hospitals, but from a financial perspective, 2022 was even bleaker.

In fall 2022, industry experts projected that 53% to 68% of hospitals would have negative margins for the calendar year. That's up from 36% in 2021, 52% in 2020, and 34% in 2019, according to a report by Kaufman Hall, a Chicago-based management consulting firm, on behalf of the American Hospital Association.

While the company's latest National Hospital Flash Report showed a slight increase in operating margins in November 2022, median hospital margins were negative for 2022 to date. Increases in the cost of labor made it harder for hospitals to earn a profit last year, although facilities did see a decrease in labor expenses in November, potentially due to less reliance on contract workers, according to the report.

Hospital finances have ebbed and flowed since the onset of the pandemic. While 2020 revenue was low relative to prepandemic levels, 2021 margins improved due to the influx of government dollars from programs like the CARES Act and the American Rescue Plan, said Erik Swanson, MPH, MS, a senior vice president with Kaufman Hall's data analytics practice.

“Now, in 2022, we are shaping up to have the worst full year since the beginning of this pandemic, and that is really due to the fact that we've had a lot of seismic shifts in the overall environment,” he said in December. “It is no longer specifically COVID that is driving this, but the downstream impacts and the pandemic as a whole in a macroeconomic perspective.”

It may turn out to have been the worst year for hospital operating margins in more than 20 years, added Matthew Bates, MPH, MS, a managing director with Kaufman Hall and the firm's physician enterprise service line lead. One challenge is that high inflation is a new experience for hospital executives, he noted.

“There is nobody in a leadership seat today who has ever managed a company during a time of inflation above 5%,” Mr. Bates said. “The last time inflation was at these levels was the '80s, and anybody who was in leadership in the '80s by now is retired.”

Plus, the last time operating margins were this poor, hospitals could use investment income to offset them, he added. “Not only are operating margins negative, in large part, at most hospitals, but we don't have the investment income to offset them with because it's been a bad year in the market as well.”

Inflation is a particular problem in health care because of the relatively fixed short-term revenue streams, from governmental payers or multiyear contracts with managed care companies, said Bryce Gartland, MD, hospital group president and co-chief of clinical operations for Emory Healthcare in Atlanta, which has 11 hospitals.

“Other industries like the airlines can raise ticket prices or charge a new fee to address acute inflation expenses. In health care, we generally do not have a mechanism for short-term inflationary costs to be covered by payers or consumers,” he said. “This asynchrony puts health care systems in an upside-down financial position until that revenue-expense equation is restabilized by either increased revenue or expense reduction.”

Continued challenges

Simultaneously, hospitals are dealing with continued staff shortages: 18% of health care and pharmaceutical workers reported leaving the industry entirely in McKinsey's Great Attrition, Great Attraction 2.0 global survey, published in 2021.

“I've been CEO 10 years, I've been on the administrative side 20 years. I've never seen this level of open positions, really across all hospitals. I'm trying to recruit, and there's just a group of people that left health care and they've gone elsewhere,” said Patrick J. Cawley, MD, MBA, FACP, CEO of MUSC Health, the health system of the Medical University of South Carolina, based in Charleston.

The most difficult positions to staff have been at the technician level, he said. “Nursing techs, radiology techs, surgery techs, anesthesia techs—these are people that get paid somewhere in the $15 to $25 [an hour] range, and I think there's competition from other companies that are paying more,” Dr. Cawley said.

Under these conditions, hospitals struggled to discharge patients in 2022 due to both internal labor shortages and worker shortages in postacute settings, leading to increased length of stay, Mr. Swanson said.

“Discharges are simply down, but patient days are up. … There isn't space, there isn't placement. There may be beds, but there aren't necessarily staffed beds in those postacute sites that allow hospitals to discharge those patients effectively,” he said.

Some of the labor shortage has been related to retirements. At many institutions, the health care workforce skewed older before the pandemic, and since the onset of COVID-19, “We saw a significant exodus of some of our more senior and experienced labor force who were either eligible for or close to retirement,” said Dr. Gartland.

That means Emory and other health care systems have had to rely on a substantial amount of contract labor (for example, locum tenens) to replace their staff, while also working to increase recruitment and retention efforts, recognition programs, and new education pipeline partnerships.

“We've seen positive results. However, the workforce pipelines have not yet generated the necessary complement, whether those are nurses, techs, physicians, or otherwise, to backfill those we've lost,” Dr. Gartland said.

From 2019 to March 2022, labor expenses at U.S. hospitals and health systems increased 37% per patient, according to a May 2022 analysis by Kaufman Hall. The spike was largely due to increased contract labor expenses, which rose from 2% to 11% of total labor expenses during the same time period.

Within MUSC Health, one rural hospital had to employ contract nurses during a COVID-19 surge in early 2021, and it was almost 18 months before it could transition back to permanent employees, Dr. Cawley said. “That was their big reason for dragging financially.”

On the plus side, the system's 14 hospitals are in the black when considered together, although its smaller community hospitals and some of its rural hospitals are having more trouble, he said.

“Some individual hospitals are in the red and ‘carried’ by others, and we're having to watch certain hospitals a little closer than others,” he said. “But we're working on the same issues everywhere, because even for our hospitals that are in the black, it wouldn't take much to push them into the red, given where the supply costs and the labor costs are.”

Not surprisingly, some hospitals didn't make it through 2022. In one high-profile closure, Atlanta Medical Center shut its doors in November after incurring more than $100 million in losses over the past year.

In the Northeast Ohio market, three hospitals closed in 2022, two that were part of a large, established system, said Brian Harte, MD, FACP, who is president of Cleveland Clinic Akron General, an academic medical center, and Cleveland Clinic's Southern Region, which includes more than a dozen health care facilities.

“Health care margins are very organization-dependent for a lot of reasons, but they're generally pretty thin,” he said. “We've got a dynamic where revenue is relatively flat, depending on the organization, and other expenses are way up. The math is pretty straightforward about the consequences of that.”

Planning for 2023

Looking ahead, Dr. Harte said his hospital aims to aggressively reduce its reliance on premium contract labor to fill staffing gaps. “We're making plans to … get back to a normal staffing level through growth of our normal employee workforce,” he said.

The hospital administration is also making “ambitious but realistic” growth targets for hospital-based services on both the inpatient and outpatient side and is expecting to increase economic efficiency, Dr. Harte said. “Some of these efficiencies are on the labor side, trying to make the most of the people that we have, and some of those efficiencies are on the access side, making sure that all of our appointments are filled, all of our testing slots are utilized,” he said.

With supply costs up almost 30% over the past year, without any additional revenue, MUSC Health is weighing its supply options and plans to make changes, Dr. Cawley said. Like others, the system also wants to slash its use of contract labor, he said. “It's getting less, but it's not going down like we'd like it to.”

Another evolving factor is that hospital employees are wanting and demanding more flexibility, such as part-time schedules, Dr. Gartland said. “Many of our systems in health care have not traditionally accommodated that degree of workforce flexibility,” he said.

But he thinks there's no going back to the old days, when virtually all employees had traditional full-time status. “We've experienced a significant workforce transition, and it has become accepted, if not expected, that there is going to be a lot more of a flexible or transient workforce than existed in the past,” Dr. Gartland said.

This is not necessarily a bad thing, as it can help address burnout and improve retention, he noted. “Our systems, processes, and cultures, however, will need to adjust to manage continued delivery of highly reliable care with these workforce changes.”

That flexibility may involve shorter shifts, four-hour shifts, or midday shifts, said Dr. Cawley. “These are things we haven't seen before, but I do think we need to react to it. You shouldn't fight it,” he said. “But it is different, and I think it's just one of the new ways that people are going to work.”

How hospitalists can help

Hospitalists will remain in an important position, according to Dr. Harte, who works as a hospitalist several times a year. “Hospitalists are invaluable, and they're not going away,” he said. However, they also need to clearly show their value and look for ways to add to it. “Now their hospitals need that value more than ever.”

Examples of targets for adding value include reducing length of stay, improving communication and collaboration with nurses, and finding other ways to reduce cost and utilization, he said.

“Whether it's hospital-acquired complications, readmissions, telemetry utilization, I would guess there's plenty of opportunity in most hospitals to continue to improve value and find more efficient and effective ways to take care of patients,” Dr. Harte said. “But it starts with knowing what value you're currently adding.”

Hospitalists are already known for adding value, particularly in the pandemic era, but they shouldn't rest on their laurels, he noted. “We have to continue building upon that because the dynamic in health care is one of continued evolution—competition, quite frankly—and … we have to continue saying, ‘What does value in 2023 look like?’”

Value might be measured by length of stay or quality outcomes, but workforce engagement and professionalism are increasingly important, Dr. Harte noted. In fact, the importance of improving the engagement of clinicians has been Dr. Cawley's main message to his leadership team.

“The things that helped you improve employee engagement two years ago may be different now, and you have to try new things,” he said. “[That] may be new schedules and being more flexible and checking in with people differently and maybe doing some things by video that were in person before.”

Hospitalists who are not feeling engaged should be aware that the grass (or cash) isn't always greener at another hospital, Mr. Bates said. “I've talked to a lot of docs recently that are like, ‘Oh, my system's struggling, it's time to jump,’” he said. “Well, the place you jump may actually be as bad or worse than the place you're in.”

On the flip side, hospitalists can boost their hospitals' recruiting efforts by promoting a positive work atmosphere, Dr. Cawley said. “Everybody wants to go to the place where there's great teamwork and camaraderie and people are connected—the docs and the nurses and the rest of the staff just get along really well,” he said.

Such deliberate shifts in culture don't happen overnight, Dr. Cawley noted. “I think this is going to take probably another two years till it settles out … so I think a hospitalist needs to think hard about helping to drive for that environment that nurses really want to come work for.”

One way to do so is to become a leader, and hospital leadership roles are a natural succession for hospitalists, given their knowledge of the environment and its challenges and front-line visibility, Dr. Harte said.

Now is a good time to grab those opportunities, said Dr. Gartland. “Some people say, ‘Oh my gosh, look at all that red and the fire going on, let's run in the other direction,’” he said. “In this type of dynamic and challenging environment, as ambiguous as it may be at times, there is tremendous opportunity to really lean in and take advantage of it and be part of the solution.”